Community Banks: You DO have that competitive advantage Presented - - PowerPoint PPT Presentation

Community Banks: You DO have that competitive advantage

Presented by: David W. Furnace CEO

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June 14, 2016

Agenda

• Industry backdrop – Community banks vs. big

banks

• Capitalizing on competitive advantages and

monetizing the customer base

• Expanding market share

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Industry Backdrop

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Total Number of Financial Institutions

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Annual Return on Assets

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Top 30 Market Share

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Loan to Deposit Rates

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Net Interest Margin

Fee Income

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Industry

• Continued improvements in loan to deposit

ratios

• Stabilized fee income
• Stabilized Net Interest Margins (for community

banks)

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Capitalizing on Competitive Advantages

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Our contrarian view…

• What is your biggest competitive advantage as it

relates to core customer growth?

• Most community banks response: better

customer service.

• Our view: better service isn’t an acquisition tool,

except in one way: referrals.

• Your bigger advantage: you have a very

different business model, so don’t follow the bigs…

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Perception

Big Bank Your Bank

Locations: Marketing Dollars: Product Offerings: Pricing on Deposits: “Too Big to Fail”: Technology: Customer Culture and Service:

Advantage #1: Capacity

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A Factory at Capacity…

• If you have a factory and you are running full out

– 3 shifts, 24/7 – Maximum Production

• Then…revenues are slashed by events beyond

your control

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A Factory at Capacity…

• It makes sense to consider the following:

– Raise prices, knowing you will sell fewer widgets – If sales fall enough, consider axing the 3rd shift to reduce costs to offset

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But what about the other factory?

• If your factory is operating at 30% capacity and

running only one shift (and we have the same fixed costs)…

• …and you have very low marginal costs…
• Should you raise prices too?
• Or should you pick off the business the other

guy is shedding and start a second shift?

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One metric to illustrate

The average community bank branch in America

• pens about 175

retail and business checking accounts per branch per year (3/branch/week) and has about 1,200 checking accounts per branch.

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Capacity, Capacity, Capacity

Community Banks average 1000-1500 customers per branch Big Banks average 4000-6000 customers per branch

Advantage #2: Marginal revenues are many multiples

• f marginal costs

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Profitability at the Margin

• In general, the notion of a single unprofitable

customer (or some segment of unprofitable customers) drives bankers to drink…

• But many businesses are made profitable at the

margin (i.e. they have many unprofitable customers):

– Movie Theaters – Convenience Stores – PayPal

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Consumer HH Averages

Account Group Ratio Average Balance

Checking 1.557 5,068 $ Savings 50.6% 6,429 $ Money Market 3.1% 60,654 $ CD 8.8% 26,552 $ IRA 3.6% 17,517 $ HSA 1.7% 2,240 $ Consumer Loan 6.8% 10,411 $ Line of Credit 1.0% 8,737 $ HELOC 3.6% 35,865 $ Mortgage 6.8% 122,547 $ Business Checking 11.7% 16,574 $ Cross-Sell Balances Total Relationships 2.534 Total Deposits 17,969 $ Total Loan Volume 10,420 $

What is this worth? $10,420 x 4.0% = $417 $ 7,549 x .25% = $19

Business “HH” averages

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Product Ratio Average Balance

Business Checking 1.521 22,962 $ Business Savings 8.4% 12,681 $ Business Money Market 5.3% 125,566 $ Business CD 2.1% 50,490 $ Business Loan 14.9% 142,853 $ Business Line of Credit 5.8% 56,917 $ Business Real Estate 9.8% 463,455 $ Retail Checking 84.5% 8,852 $ Retail Savings 43.5% 7,113 $ Retail Money Market 5.0% 91,811 $ Retail CD 7.2% 30,001 $ Retail IRA 3.3% 14,148 $ Retail HSA 2.3% 2,650 $ Retail Consumer Loan 7.1% 16,045 $ Retail Line of Credit 6.0% 7,144 $ Retail HELOC 3.8% 43,064 $ Retail Mortgage 8.5% 170,382 $ Total Relationships 3.696 Total Business Deposits 43,705 $ Total Business Loan Volume 70,005 $ Total Business & Retail Deps 61,558 $ Total Business & Retail Loans 87,691 $

What is this worth? $70,005 x 4.0% = $2,800

Fee Revenue

• NSFs: ~$100/account on average, net of

chargeoffs

• Interchange income: ~$50 on average in net

interchange income

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Marginal Revenue

• Balances (assuming you can get the Haberfeld

Client averages for loans/HH): $400+

• Fee Revenue: $150
• Annual Marginal Revenue: $550
• …and they stay for an average of > 8 years!

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Marginal costs are pretty low

• So you add one more PFI customer:

– Issue a debit card – Send a statement (perhaps) – A little more data processing – Write off a little principal from overdrafts on some

• Our client average direct marginal costs

are about $30-$40/customer/year

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Net Present Value

• f the Relationship

Retail: $2,902 Business: $10,353

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The high-level math

• The typical bank spends about $200 to get a new

customer (one more than they were getting at “steady rate”)

• The average customer produces > $300/year in

marginal value (conservatively, in my opinion)

• They will stay for an average of > 8 years
• An average customer is worth in excess of $2,000 over

their lifetime

• You have tremendous excess capacity
• If you get a lot more of them, fee income goes up, and

you haven't raised your fees

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Expanding Market Share

You have to steal from the other guys

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My Opinion

• Bankers will spend money for acquisitions and to

build new branches in order to grow…

• But they severely under-invest in marketing to fill

up the branches they already have.

• Most community banks can DOUBLE the

number of new customers they are attacting!

• …and do it in a very profitable way.

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First, become the PFI

• You are the Primary Financial Institution when a

customer gives your name in response to the question: “Where do you bank?”

• To do that, you have to capture their primary
• perating checking account
• Once you get that, you own the PFI relationship
• They are now available to buy loans, other

deposit products and produce fee income

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Stealing from the BIGs

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Convenience is still #1

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How do you find prospects that will find you convenient?

• Demonstrated Convenience

– They are the neighbors of the customers you already have – They live around your branches

• Predicted Convenience – use of cell phone and

GPS data

– They work around your branches – They drive by your branches – They walk, shop or eat nearby your branches with regularity

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DRIVE MORE TRAFFIC: TARGETING MATTERS

Demonstrated Convenience Predicted Convenience

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Digital targeting is getting better

• Always be Testing
• In the past, many community banks have tried digital

marketing, but the cost of acquisition was not optimal

• But, that is potentially changing:

– 68% of all electronic ads served today have location-based data associated with them – No longer “spraying”

• Geo-fencing
• IP Matching

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Good Checking Product

• What do people want?
• Simple, low or no hurdles, no cost
• KISS, KISS, KISS
• Pride in product at the front line is a MUST!
• Complexity creates barriers
• Question: can you make money offering this?

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4 dynamics to effective marketing for PFI Customer growth

• 1. The Market is fixed – you have to steal market

share and that should cause a change in approach.

• 2. You can’t get anyone to switch, so don’t try. Do

something subtly, but profoundly, different.

• 3. You will generally get what your branch will

give you in terms of customer profile.

• 4. Policies and Process really matter.

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Dynamic #1: The Market is Fixed

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Dynamic #1: The Market is Fixed

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In a Fixed Market…

• In a given year, about 10% - 15% of the

households “change banks”.

• When you start getting new customers, by

definition, your competition is getting fewer.

• We call the system net zero—when FIs are

trading households back and forth

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The good news!

A fixed market is an infinite “pipeline” of opportunity

Dynamic #2: You can’t get anyone to switch

But, you can do something different that will have a huge impact on results…and this will drive the approach and timing of your marketing.

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“Changing Banks”

• Switching is really, really hard
• People only do it if they have to
• Certain events beyond our control

create the opportunity, you rarely get people to switch, it’s just too hard

• Be there when they decide to switch
• Set the right conditions for them to

notice and pick you!

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• Mad at the old bank (70%)
• Moved
• Changed Jobs
• Got married
• Got divorced
• Changed bookkeeper
• It is almost all event driven…

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Why do people change banks?

When do people change banks?

• When they have money
• When do they have money?

– When they get paid

• When do people get paid?

– Weekly or bi-monthly

• About every 6 weeks you get a

double-whammy payday

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Dynamic #3: You generally will get what your branch will give you

And they aren’t the dregs of society

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Unprofitable customers will clog our lobbies!!!

• First, your lobbies aren’t clogged – most of

the time I could fire a cannon off and not hit a customer!

• Second, the new customers you will get will

look pretty much like the customers you are already getting. If you want different looking customers, move your branches.

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It turns out…

• When you market the right way, you get a lot

more of the neighbors of the customers you are already getting.

• They look very similar to your current customer

base.

• You DON’T get the dregs of society.
• The only material way they skew differently over

time is average age will drop.

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Dynamic #4: Policies and Process really matter

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You only get a few shots a week – DON’T WASTE THEM

• Do your written policies actually match your frontline

practices?

• What do you “require” for new customer to open

accounts and is it really necessary?

– What kind of ID do I need? – Does my wife need to be here? – Can we open the account today? – Do you use ChexSystems?

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The right policies

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Another example - ChexSystems

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• Consumers make EMOTIONAL decisions and

usually select the product they hate the least

• Takes the emotion out of the

selection and purchasing process

• A maximum of three questions always finds the right

account for our new PFI customer

• The customer is actively involved in the process,

guided by staff

• A brochure that makes it easy

The right process

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Sales Process

Two final thoughts…

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Thank you!

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